I am a senior editor at Forbes, covering legal affairs, corporate finance, macroeconomics and the occasional sailing story. I was the Southwest Bureau manager for Forbes in Houston from 1999 to 2003, when I returned home to Connecticut for a Knight fellowship at Yale Law School. Before that I worked for Bloomberg Business News in Houston and the late, great Dallas Times Herald and Houston Post. While I am a Chartered Financial Analyst and have a year of law school under my belt, most of what I know about financial journalism, I learned in Texas.

Wal-Mart's 'Swipe Fees' Are A Political Weapon Against Visa

In its news release condemning the proposed $7.25 billion antitrust settlement with Visa and MasterCard, Wal-Mart makes it sound like it’s all about the consumer. The world’s biggest retailer refers to “hidden swipe fees” that “cost consumers tens of billions of dollars each year.”

The choice of words is deliberate, if a little misleading. Ask most people what a “swipe fee” is and they’d probably say a surcharge, like the $2 fee banks attach to a withdrawal from an automated teller machine. But this swipe fee is hidden, Wal-Mart says. Hidden so well that some of the world’s best-paid economists disagree on who pays it, and whether consumers would benefit if it magically disappeared. Because Wal-Mart is talking about the 1-3% haircut retailers are forced to take when their customers pay with plastic, not an additional charge the credit-card companies put on customer bills.

Consumers may pay that fee eventually in the form of higher prices, but they don’t all pay it, and not in equal amounts. The consumer paying with a rewards-laden MasterCard might get something else she values highly out of the transaction: Miles toward her next vacation in Tortola. Others get a 2% kickback toward their kid’s college education, courtesy of American Express, which charges even higher fees to merchants (but is mysteriously absent from the harsh accusations of antitrust against Visa and MasterCard).

By calling the charge it pays a “swipe fee,” then, Wal-Mart is appealing to consumers to fix a problem the mighty retailer can’t fix itself. Credit-card companies focus their competitive energy on consumers, offering airline miles and other perks, because consumers value them more highly than an abstract savings from lower interchange fees. The credit-card companies don’t compete as much on fees, and merchants hate it.

“Swipe fee” is a way to enlist consumers in the cause of limiting interchange fees, even if that won’t clearly help consumers at all. Merchants would be slow to trim their prices in response, said Richard Schmalensee, an M.I.T. economics professor who’s studied interchange fees (and has done work for Visa and the banks in the past.)

“In the short run, if you drastically reduce interchange fees retailers will make more money,” he told me. “Cost changes get passed through in the long run, but in the short run you don’t re-mark everything.”

Focusing attention on the swipe fee was an effective strategy during the debate over the Durbin amendment, which required the Federal Reserve to cap the fees banks charged merchants for processing debit-card transactions. The Fed ultimately capped those fees at 21 cents per transaction, which helped retailers but also caused banks to cut back on free checking and other goodies for their customers.

Retailers accuse Visa and MasterCard of running an antitrust scheme which allows them to charge excessive fees to retailers, which run about $40 billion a year. While retailers are free to negotiate their own interchange fees with issuing banks, plaintiff lawyers say the scheme is enforced by “default” rates that most banks charge instead, squelching competition. The whole idea of an interchange fee is a historical anomaly, Schmalensee explained, since Visa and MasterCard were originally formed as non-profit cooperatives among the banks that passed the fee from merchant banks, which handled transactions for the retailers, to “acquiring banks,” which recruited the credit-card customers.

Amex and Discover cover their costs with individual contracts with retailers and merchant banks. The fact that the costs of their networks still land on retailers undercuts the theory that Visa and MasterCard are somehow imposing costs on merchants that they couldn’t get away with absent a conspiracy, Schmalensee said.

The big problem for the retailers is that consumers don’t care how much the banks are charging a merchant to process a card transaction. The benefit to the consumer is all Visa and MasterCard transactions are honored at all stores with the logos on the front door. The retailers would like to be able to steer consumers toward transactions that cost them less — hence the provision in the settlement allowing them to surcharge for plastic. But retailers already have that power and few of them use it. Under federal law they can offer discounts for cash but don’t, undermining their argument that the interchange fees are imposed unfairly on all consumers.

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So, the big bad spoiled retailer Wal-Mart Inc will once again screw over the smaller retailers…? Tell me something I don’t know.. Never knew a company (monopoly) like Wal-Mart would ever have enough power to determine the function and profitability of other retailers.. I thought the government was against monopolies..? Oh well, money does change every thing.. smh

The credit card companies prevented retailers from determining their own future by prohibiting a retailers from adding a charge for taking a credit card ( but then did allow a cash discount…). Let retailers do what they feel best for their business and then consumers will decide where to buy. One company should not be able to dictate the business practice of another company.

Retailers may not have been able to charge a fee for using credit cards but they are able to increase prices to cover the costs. Businesses pass on all costs to CONSUMERS in the form of higher product prices. Fighting for the consumer is so bogus but Walmart, like many others, know the usefulness of taking something they want to do for their own gain and wrapping it about with something that sounds nobel – “fighting for the little guys”. It seems so much less self-serving and buys the sentiments and loyalties of others cheaply.

The bottom line is that Walmart, no stranger to profit motives and very aggressive against competitors, wants to reduce its costs (retain more profit) by going after others who make profits and labeling them as anti-consumer and greedy. Walmart itself is notorious for hammering its vendors on prices to increase their market advantage and profit over other retailers and is the major conduit for foreign produced goods. In addition, there is no guarantee that the consumer will see much relief at all – if any.

Lets take an example. A store charges $100 for item A. A surcharge adds $1 to the cost of that item making it $101 for the plastic card holder. It does not affect the store’s profit. A cash discount on that $100 item to $99 takes a dollar off the store’s profits. See the difference?

The merchant contracts generally prohibit a retailer from surcharging for credit because of the disclosure implications under Regulation Z – specifically 12 CFR 1026.(a)(1). It would be a logistical nightmare to recalculate the APR on a monthly statement based on each individual surcharge.

§ 1026.4 Finance charge.

(a) Definition. The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction.

(1) Charges by third parties. The finance charge includes fees and amounts charged by someone other than the creditor

However, Reg. Z DOES provide this “out” for retailers in 12 CFR 1026.12(f)

(1) Prohibit any person who honors a credit card from offering a discount to a consumer to induce the consumer to pay by cash, check, or similar means rather than by use of a credit card or its underlying account for the purchase of property or services;

So in my long-winded regulatory reply, what I am saying is that retailers are not allowed to surcharge for credit card purchases due to the merchant contracts because the card issuers do not want to recalculate the Annual Percentage Rate every month because the credit “surcharge” is considered a finance charge under Regulation Z.

But Regulation Z allows merchants to offer cash discounts.

If you’re going to complain about a practice, it helps to understand the regulatory restrictions that brought about that practice. The regulation itself cannot change unless Congress amends the Truth In Lending Act to allow for it. And that’s just not going to happen.

Fascinating. But if this fight is all about merchants being able to give pricing information to consumers, why aren’t they doing it with discounts already? From the consumer’s perspective, a discount for cash is identical to a surcharge for credit.